Tape 10 - Interest rates; more 1969 forecast

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-	Instructional Dynamics Incorporated	0:01
	welcomes you to another in a continuing series	0:04
	of commentaries on the current economic scene.	0:06
	With us again for the week of January 13,	0:09
	is Dr. Paul Samuelson, professor of economics	0:11
	at the Massachusetts Institute of Technology.	0:14
	Here now is Professor Samuelson.	0:17
-	I promised in the last tape	0:19
	that I would talk about interest rates.	0:21
	For this middle of January 1969,	0:23
	I don't suppose one could pick a more timely topic.	0:27
	Course the biggest news in the money market	0:31
	has been the recent increase in the prime rate.	0:33
	Not only has that prime rate risen	0:37
	to an astounding level,	0:39
	not seen for decades, even generations,	0:41
	but what is even more remarkable	0:45
	is the frequency with which it has moved recently.	0:47
	It was not so long ago that the Chase bank	0:50
	held the lonely position of quoting a 6% prime rate.	0:53
	Then the Chase rejoined the other banks.	0:57
	Then they all went up.	1:00
	Then they went up again	1:02
	and now we've had the latest increase.	1:04
	Apparently this last increase	1:07
	has caught Wall Street off guard.	1:09
	I say apparently because no one can ever be sure	1:11
	just why the stock market declines.	1:15
	There are many explanations after the fact.	1:18
	In deed, whenever there is a 15 point move	1:22
	in the Dow Jones averages,	1:25
	the populous presumes that there has to be	1:27
	some explanation for it.	1:30
	Perhaps there's tension in the Middle East.	1:32
	Perhaps the appoint of Henry Cabot Lodge,	1:34
	an alleged hawk, and therefore an omen	1:37
	that peace will be that much more unlikely.	1:39
	Such rationalizations are scarcely worth	1:43
	the paper they're written on.	1:46
	I only mention them to make this point.	1:47
	But the hardening of money,	1:52
	that could be a sensible and a more lasting reason	1:54
	for stocks to react.	1:58
	I don't consider it my business primarily	2:01
	to cast a horoscope of Wall Street,	2:03
	but if time permits later,	2:06
	I may possibly comment on some of the pros and cons	2:08
	of the proposition that as interest rates go up,	2:13
	there is downward pressure	2:17
	upon the index number of stock prices.	2:19
	What was the immediate cause of the rise in the prime rate	2:23
	and of interest yields generally?	2:26
	Undoubtedly, the immediate cause has to be traced to the	2:30
	decision of the Federal Reserve board	2:34
	to raise the discount rate.	2:37
	That particular decision was itself predictable	2:41
	from the strength that had been developing in the economy	2:47
	in comparison with the earlier expectations of moderation.	2:51
	But I should like to call your attention	2:57
	to something that was not done	2:59
	at the time that the discount rate was recently increased.	3:02
	At that time the Federal Reserve Board could have	3:07
	made a change in Regulation Q.	3:11
	That is, it could have lifted the interest rate ceiling	3:15
	that the banks can pay on timed deposits.	3:19
	No doubt this was discussed	3:23
	at the Open Market Committee meetings.	3:25
	And no doubt there was a tacit vote taking in the matter.	3:28
	But in any case for the moment, for the month,	3:33
	no change was made in Regulation Q.	3:37
	This means that market rates of interest	3:40
	are beginning generally to climb	3:42
	above the ceiling rates of interest.	3:45
	And we know from basic economics	3:47
	what is likely to happen under those conditions.	3:51
	If a corporation treasure can make a better yield	3:55
	on a 90 day Treasury bill in the open market	4:01
	then he can receive on a certificate of deposit, a CD,	4:05
	from the First National City Bank,	4:08
	because the First National City Bank	4:10
	is not permitted to bid for that deposit	4:11
	more than the Regulation Q ceiling rate,	4:16
	then in very little time,	4:19
	that corporation treasurer will shift some his funds	4:21
	or all of his funds into the open market	4:26
	and buy Treasury bills direct.	4:30
	This process of disintermediation is predictable,	4:33
	it is gradual, but it is quick.	4:37
	And so the failure to increase the Regulation Q ceiling	4:41
	at the time that the discount rate was increased	4:46
	could predictably be expected	4:50
	to result in runoff of certificates of deposit,	4:52
	a reduction in that component of the broad definition	4:56
	of the money supply, which CDs constitute.	4:59
	The Federal Reserve Board knows that	5:04
	better than you and I do,	5:06
	and so this policy was done deliberately.	5:08
	The thought in part must have been,	5:13
	let's put a squeeze on the commercial banks.	5:17
	Let's let the money that they depend upon start drying up	5:20
	so that they will begin to be more	5:26
	tough with their customers	5:31
	and this will slow down the rate of increase	5:33
	of ordinary commercial credit.	5:35
	It's like game a chess or a game of dominoes.	5:38
	You knock down one domino and that's knocks down another.	5:42
	The pressure was put upon the commercial banks.	5:46
	This is the reaction of the commercial banks.	5:51
	As one commercial banker put it very candidly,	5:53
	if we're going to have less money	5:57
	and if the market, the traffic will bear high interest rates	5:58
	to ration out that money,	6:04
	let's be sure that we make more on each dollar	6:06
	of the fewer dollars	6:10
	that the Fed is going to permit us to have.	6:11
	When I say fewer dollars,	6:14
	of course I mean a slower rate of growth in the dollars,	6:15
	I don't mean necessarily an absolute rollback,	6:18
	although there will be and has been,	6:21
	an absolute rollback in certificates of deposits,	6:23
	just as there was back in 1966	6:27
	at the time of the so called money crunch.	6:33
	I don't think that listeners of my tapes	6:40
	will be astounded by all this.	6:42
	I have argued right along,	6:46
	that it is never easy to predict in economics	6:49
	but that certain predictions are easier than others.	6:52
	And if business is over-exuberant,	6:56
	if the inflation rate pressure continues,	6:59
	then that is your most important clue	7:02
	as to what the Federal Reserve will be doing	7:06
	in trying to pursue that vague policy	7:08
	which it calls leaning against the wind.	7:13
	And so the Federal Reserve has leaned a little bit harder	7:16
	against the winds of inflation.	7:20
	It has permitted the tightening of money	7:22
	in the money market.	7:24
	It has engineered a tightening of money	7:25
	in the money market as measured	7:28
	by the availability of credit at previous interest rates.	7:31
	There is no one way to measure properly, in my judgment	7:37
	the tightness and easiness of money.	7:42
	There's tautological way of defining it,	7:45
	namely by what happens to the money supply	7:47
	and that is what it is.	7:50
	It is itself.	7:52
	But that is only one component	7:53
	in a large vector of magnitudes which I monitor	7:55
	every month and every quarter in trying to understand	8:00
	what is changing in the money supply, I mean, excuse me,	8:05
	in the credit markets generally.	8:10
	Now what about the rate of change of the money supply?	8:15
	The latest figures that I have seen	8:21
	suggest that there has been an increase in the money supply,	8:23
	the rate of growth in November.	8:27
	I'm not sure what's happened in the more recent period.	8:31
	It's a little hard with flu and with Christmas	8:36
	and with the weather to be sure	8:40
	just what is happening to the float	8:44
	and to the money market magnitudes	8:46
	in the weeks that have just passed.	8:51
	But it does look as if, just as in July,	8:54
	there was a sudden increase in the rate of growth	8:59
	of the money supply,	9:01
	so there was an acceleration of that rate in November.	9:03
	Now if I gave sole weight to the behavior	9:10
	of the rate of growth of the money supply	9:16
	or if I gave almost sole weight on that vector,	9:19
	I suppose I should say that six months from November,	9:25
	that's about next May and June,	9:29
	the economy will be particularly strong.	9:33
	Actually, I think for other reasons,	9:37
	in the third quarter of next year,	9:39
	this economy is going to be particularly strong.	9:41
	There are going to be some special fiscal reasons,	9:44
	namely three billion of those reasons,	9:46
	the legislated increase in wage increase	9:50
	of the governmental employees	9:54
	is expected to feed in very strongly.	9:57
	So different explanations are going to coincide,	10:01
	if indeed that expected pattern does materialize.	10:05
	Let me say something though about the increase in the	10:12
	rate of growth of the money supply in November.	10:16
	If you take the rather simple,	10:19
	or simplist attitude that it's an easy thing	10:23
	to control the rate of growth of the money supply	10:26
	for the Federal Reserve,	10:29
	all the Federal Reserve has to do	10:30
	is to buckle down to it, set its mind to it.	10:32
	Watch one thing, number one thing like a Libertine	10:36
	who's primary and only interest is sex,	10:41
	just concentrate upon that topic number one,	10:44
	then the Federal Reserve has to be regarded	10:47
	as having departed from its senses in November.	10:51
	Suddenly this Board of fairly intelligent people	10:55
	as tested by the Darwinian process of survival in life	11:03
	took leave of their senses	11:08
	and engineered a great increase in the money supply.	11:10
	Now that's one way of looking at the matter.	11:14
	It's like a Rorschach blot test	11:19
	and there are a few economists who	11:22
	do look upon it in that way.	11:25
	One has no quarrel with that,	11:30
	although it's a bit superficial.	11:33
	Because those economists,	11:35
	if that's the only way the look up on it,	11:38
	have no way of predicting when these aberrations	11:41
	of judgment hit the Federal Reserve.	11:44
	So even if I held that view,	11:48
	I would try to dig a little bit deeper	11:50
	and a little bit wider in understanding	11:54
	the behavior of the Federal Reserve.	11:56
	I have an alternative hypothesis.	11:59
	It's not really an alternative hypothesis,	12:03
	but it's a supplementary hypothesis	12:04
	that I think my listeners might be interested in.	12:06
	It's a way of predicating aberrations	12:10
	in the rate of growth of the money supply	12:13
	by the Federal Reserve.	12:15
	It isn't terribly new with me,	12:16
	although I've used it for many years	12:20
	and it's not terribly subtle,	12:22
	and I don't even think it's controversial.	12:26
	Although if you agree with this hypothesis,	12:28
	it does require you rethink	12:33
	the interpretation of the evidence	12:33
	which alleges to show that	12:39
	the rate of growth of money is itself	12:42
	either the sole predictable element	12:45
	in terms of aggregate demand,	12:48
	or by all odds the most important.	12:49
	Now the hypothesis is the following.	12:55
	The Federal Reserve watches	12:59
	the rate of growth of the money supply.	13:01
	It also watches the general behavior of interest rates	13:03
	and the general behavior of the availability of money.	13:09
	It is reluctant to have interest rates become disorderly	13:16
	and it is reluctant to have interest rates	13:21
	change quote, too fast, unquote.	13:23
	Now this doesn't mean that the Federal Reserve	13:27
	is always pegging interest rates,	13:30
	but it does mean that it is smoothing out	13:32
	the fluctuations in interest rates.	13:36
	And if interest rates start to go in one direction,	13:38
	the Federal Reserve acts as something of a scalper,	13:41
	just the way a hedger, a speculator, or a scalper	13:46
	would behavior in a commodity or foreign exchange market	13:51
	if he sorta bet on the law of averages	13:57
	and against any one new event	13:59
	as being of cataclysmic importance.	14:01
	And generally speaking,	14:03
	as far as the price in that commodity is concerned	14:05
	or the foreign exchange market is concerned,	14:07
	unless he's wildly wrong in this presumption	14:10
	he performs a stabilizing function for that price.	14:13
	I should add that stabilizing price	14:17
	often destabilizes a quantity.	14:20
	And as the Fed modulates the changes in interest rates	14:22
	it thereby accentuates the fluctuations	14:27
	in the rate of growth of the money supply.	14:31
	Well that's of course my point.	14:33
	I've had some limited success in predicting	14:35
	excessive fluctuations in the rate of growth	14:44
	of the money supply around it's mean,	14:46
	from residuals in the rate of growth of the economy itself.	14:48
	When the economy grows faster than people had expected	14:55
	or than they liked,	14:59
	and when I say people, I mean authorities,	15:01
	then I've noticed there is a concomitant tendency	15:03
	for the rate of growth of the money supply to increase.	15:07
	Since strength in the GNP in any quarter	15:11
	tends to be positively correlated with strength	15:16
	in the GNP in the next quarter	15:19
	and the next quarter after that,	15:21
	there is a spurious correlation	15:24
	that some people fall prey to,	15:27
	in which they think that all of that subsequent strength	15:30
	is due to the money supply.	15:33
	Actually, it is very easy to construct on a computer	15:36
	or even with pencil and paper, a model,	15:40
	in which by hypothesis money has no causal influence.	15:44
	That by the way does not happen to be my position.	15:52
	My position is that, the behavior of money	15:58
	is a very important thing.	16:00
	The behavior of government expenditure	16:03
	is a very important thing for effecting	16:06
	the predictable level of total effective demand.	16:09
	The behavior of tax rates and taxation	16:12
	is a very important thing for effecting the total.	16:15
	I wouldn't like to give quantitative precision to that	16:18
	and say since I've named three factors,	16:22
	each one has a 33 1/3% importance.	16:25
	It's much more complicated to state	16:28
	the relative orders of importance.	16:31
	But let me go back now,	16:34
	because I think it will help us understand the money market	16:37
	as it develops in the months ahead	16:39
	to an artificial model, which is very easy to construct,	16:42
	in which money is the tail of the dog	16:48
	and the behavior of the fiscal and other variables	16:52
	of gross national product are the body of the dog	16:57
	and this wags the money tail.	17:00
	Now if we take such an extreme model,	17:04
	in which today, in this country,	17:07
	as far as I know, nobody believes.	17:09
	I think you could have found in 1939 a number of people,	17:12
	maybe even a majority of the people	17:18
	who believed in a model something like that.	17:21
	By 1949, their number had thinned down.	17:24
	And I supposed there's some people,	17:29
	who whatever they learned at the age of 25	17:31
	never changed their mind thereafter.	17:33
	And so there must be a generation of people	17:35
	born in 1914 who are economists today	17:37
	and who believed what I'm describing in 1939	17:41
	and still believe it	17:44
	and will go down to their graves believing it.	17:46
	But I can't honestly identify any in the American scene.	17:48
	There are more, I might mention, in London and in England	17:52
	and some of us are engaged right at this time	17:59
	in trying to reeducate the English	18:02
	on the importance of money,	18:04
	the fact that money does matter.	18:07
	It's only right that we should reeducate the English,	18:10
	because the English have done so much	18:14
	to educate us Americans over the centuries.	18:16
	This is a return, lend-lease.	18:20
	It's hard work to reeducate English economists	18:24
	I may say parenthetically,	18:30
	but there does seem to be a little bit of progress.	18:32
	Well in that model, in which nobody believes,	18:35
	you get timing pretty much like that,	18:42
	which we actually see in the marketplace today.	18:48
	That's what makes it so difficult to infer	18:51
	from contemporary experience,	18:54
	exactly what true model lies behind.	18:57
	And yet, that's the art of economics.	19:01
	That's the art of the science of economics.	19:05
	That's the essence of economic judgment.	19:08
	How to piece together all the little bits of evidence,	19:11
	some of which are contradictory,	19:14
	some of which are overlapping,	19:15
	some of which are irrelevant	19:17
	into the most plausible hypothesis for the	19:19
	understanding, explanation, and prediction of future events.	19:24
	Well in this laboratory model,	19:30
	we pick up a very strong influence for money	19:33
	even though we put into the model no influence of money,	19:37
	because of the fact that when the body of the dog	19:42
	is very strong, it gives the tail of the dog	19:46
	a very strong wag.	19:49
	And when the body of the dog is very strong,	19:51
	for reasons of continuity and the serial correlation,	19:54
	it tends to be strong in the following period.	20:00
	A very naive empirical scientist	20:03
	who sees the tail of the dog give a strong wag,	20:07
	says ah ha, that was followed by strength	20:11
	in the body of the dog	20:14
	and therefore the tail, I state the new proposition,	20:15
	the tails of dogs are what wag dogs.	20:20
	Well I am of course caricaturing the subject,	20:24
	but I think I do a certain rough justice	20:31
	to some of the work which passes my desk in so doing.	20:34
	No I don't wanna be dogmatic on this,	20:42
	it's a very complicated problem,	20:46
	and I think some wise man has warned us	20:48
	against the use of analogies.	20:54
	And often when analogies come in,	20:55
	of then the case is very weak,	20:57
	and we ought to listen to all the wise men.	20:59
	It's not a question of dog and tail,	21:03
	it's more the question of moon, earth, sun,	21:07
	mutual determination between,	21:15
	this is my opinion between fiscal variables,	21:17
	between the spontaneous behavior	21:21
	of private capital formation	21:25
	and the Federal Reserve created change	21:27
	in the rate of growth of the money supply.	21:33
	Now let me turn back to the immediate money market.	21:37
	Where is this all going to go?	21:43
	Again, I remind you, the single most important factor	21:48
	in understanding where an April's Fool Day	21:54
	interest rates will be,	21:58
	is to form some judgment as to	22:00
	what will be the strength of the GNP,	22:04
	what will be the strength of department store sales,	22:07
	all the main components between now and April 1.	22:11
	Because when the Open Market Committee meets on April 1,	22:16
	what will be freshest in their mind	22:22
	will be what the economy has been doing	22:24
	in the last two or three months.	22:26
	And their staff will have prepared for them	22:28
	a set of extrapolations based upon	22:30
	a longer period than that,	22:35
	but the tone of those extrapolations	22:36
	will very much be determined by the strength of the economy.	22:40
	So that leads me to the perennial question	22:45
	which we'll come back to week after week,	22:51
	because it is topic number one	22:54
	for anyone who is following the contemporary	22:57
	behavior of an economy like the American economy.	23:00
	What is the outlook for GNP in general?	23:05
	Now you know the view that I prepared for New Year's,	23:11
	because I mentioned it here.	23:18
	It was for a 924 billion GNP.	23:20
	At the time that I prepared it,	23:26
	I was rather ahead of the crowd.	23:28
	The National Industrial Conference Board figure	23:33
	associated with the name of Paul McCracken,	23:37
	although he was only one member of that panel at that time	23:40
	and at that time had not been designated	23:43
	as Chairman of the Council of Economic Advisors	23:45
	was for 915 billion.	23:49
	There is a panel at the National Bureau of Economic Research	23:52
	is now interrogating at regular intervals	23:55
	to see how well such a panel	23:59
	of economists does in prediction	24:01
	and I could predict what	24:04
	their prediction would be and it was.	24:06
	It was in those same levels.	24:09
	One of the things about such panels as I've noticed,	24:13
	and I use it to predict their behavior	24:16
	and predict the errors in their behavior,	24:18
	is that they're always behind.	24:21
	They're always behind the most informed judgment	24:23
	of the frontiersman	24:26
	and that's why the government hands down	24:29
	has won in its predictions	24:31
	with the Business Advisory Council for the eight years.	24:33
	I've been making a tally	24:36
	of what the Business Advisory Council people,	24:38
	with some of the best business economists	24:40
	in the business there and what the contemporaneous	24:42
	government predictions are.	24:45
	And heaven knows the government predictions	24:47
	have not been anywhere near perfect.	24:49
	It's hard to say whether they've been	24:53
	excellent or good or fair,	24:55
	but they've been a lot a better	24:58
	than those of the Business Advisory Council.	25:01
	But for precisely for this reason	25:04
	that the Business Advisory Council	25:05
	is giving the conventional wisdom of six weeks earlier.	25:07
	Since New Year's we've had time passing	25:13
	and I would say that most of the predictions that I've seen	25:20
	are coming up to my own level and even going beyond.	25:23
	The last that I should add to the sweepstakes	25:30
	is that of Walter Heller.	25:33
	Walter Heller writes an occasional letter	25:36
	for the National City Bank of Minneapolis.	25:39
	I imagine that any interested person	25:43
	can get on their mailing list for this.	25:46
	I always read it with great interest.	25:49
	I'm a friend of Walter Heller's	25:52
	and you must discount what I'm saying on that account.	25:56
	I have an even greater interest	26:02
	because as he said in the latest issue in a footnote,	26:03
	the quantitative forecasts in this letter	26:08
	are largely the work of my colleague	26:10
	at the University of Minnesota, Professor George L. Perry.	26:11
	Well Professor George Perry is an old friend of mine	26:14
	and is a PhD from MIT.	26:17
	So over the years I've watched his work	26:22
	and developed a certain amount of confidence	26:27
	in his numerical predictions.	26:29
	Walter Heller predicts even more than I do, 926 billion,	26:33
	this is as of January 7 prediction.	26:38
	And my impression is that inside the government itself,	26:42
	the predictions are getting to be around the 925 level.	26:49
	I won't go into the reasons for them,	26:54
	but I will conclude by speculating	26:56
	something that you will know the answer to,	26:59
	perhaps by the time you listen to this tape.	27:01
	What will the outgoing President Johnson	27:06
	recommend with respect to the surcharge	27:11
	when it expires on July 1?	27:14
	Now we've heard a lotta gossip about that.	27:17
	I hope that if he says anything at all,	27:20
	and just doesn't say reserve judgment	27:25
	and say it's for the new man to decide,	27:28
	that he will say nothing,	27:31
	which suggests that the surtax	27:33
	ought definitely to be repealed.	27:35
	I don't think we can prudently	27:39
	dispense with the surtax	27:41
	based upon my present pattern of information.	27:42
	He could say, cut it by 5%.	27:46
	Now there are some political considerations of jockeying.	27:50
	So if the economy were to turn weak	27:54
	and Mr. Nixon were to find it advantageous	27:56
	to repeal the tax in July in entirety,	27:58
	Johnson might feel he'd been outmaneuvered	28:03
	if hadn't already recommended it.	28:05
	But I hope will throw all political jockeying to the winds	28:07
	as he goes out and call the shots	28:10
	exactly as he sees them at this time.	28:12
	Now how should he then call the shots?	28:15
	If he were to ask me for a judgment in this matter,	28:18
	based upon everything that I know	28:22
	including the kind of prediction	28:23
	that I have made for the year,	28:24
	it seems to me that it would be imprudent at this time	28:26
	to talk of repealing the tax or cutting it down to 5%.	28:32
	Well we'll see what the President,	28:38
	the outgoing President does say.	28:40
	Thank you.	28:42
-	Thank you professor Paul Samuelson of MIT.	28:43
	If you have questions, comments, or suggestions,	28:46
	please feel free to write us	28:49
	at Instructional Dynamics Incorporated,	28:51
	166 East Superior Street, Chicago 60611.	28:53

Item Info

Title:

Tape 10 - Interest rates; more 1969 forecast

Date:

1969

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

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Identifier:

RL10082-CS-0010
ref2159_kuz
samuelsonpaul
duke:325033
pstau001010
ark:/87924/r42z1357k
e3a66e8e-2174-4a21-b6b2-186f33e34a51

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Tape 10 - Interest rates; more 1969 forecast

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Economists' Papers Archive

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